Building an Early Stage Biotech Company on Strong Foundations

By Peter WinterBioWorld Insight Editor

The "new normal" is not only causing big pharma firms to adapt their business strategies to current realities (see the cover story in this issue), but it also has cascaded down to impact companies which are just starting out on their journey of drug development. The "new normal" might not seem that much different from previous periods of fiscal constraints the biotech sector has experienced during its history. However, back then there was an expectation that the good times would eventually return. In the present climate there is no deeply held conviction that the current conditions will ever improve.

For fledgling biotechs it is now becoming harder to attract capital given the fact that traditional venture capital firms are pulling back from investing in early stage biotech projects that have not yet reached the clinic.

In this prevailing risk-averse environment new players are "stepping up to the plate" and providing sources of vital capital to kick start promising biotech innovation. Among these include philanthropic foundations and clinical research organizations (CROs).

Nonprofit medical research organizations can offer key assets such as non-dilutive funding, disease expertise, third-party networks and patient access that can prove invaluable to young biotechs with promising technology but scarce resources. The involvement of foundations reflects a significant shift that is occurring in the funding of early stage drug discovery.

Take the case of the CHDI Foundation Inc., which is focused on Huntington's disease (HD), a devastating familial disorder caused by a mutation in the huntingtin gene. The privately funded not-for-profit research organization is typical of many specific disease oriented foundations that biotechs can access.

The CHDI has numerous partnerships with a global network of biotechs and academic institutions. In October, for example, it extended an existing collaboration with Germany's Evotec AG aiming to accelerate the development of drugs that slow the progression of HD. The new contract with the CRO is valued at up to $41 million in research payments through 2015. (See BioWorld Today, Oct. 31, 2012.)

In addition to working with foundations, CROs have engaged in a business model that involves taking equity in start-up biotechs in exchange for discounts on their services.

It's a model that works well with companies that have a single asset, Michael Recny, president, Calvert Research LLC, a strategic advisory and equity investment firm, told BioWorld Insight.

Calvert Research has backed companies with preclinical molecules for more than seven years. "Our investment model does not focus on the big platform companies because we cannot make a difference in a company that is looking to raise $50 to $100 million. We prefer to be very selective and focus on single asset companies."

Its CRO affiliate, Calvert Laboratories, offers lead identification and lead optimization services and a wide array of preclinical services. Calvert Research typically assigns between 40 percent and 50 percent of the cost of CRO services toward an equity stake in a company. The arrangement is intended to get a molecule to investigational new drug application in two years or less, at which time a larger player can take over.

"We are somewhat contrarian in our approach to investing in preclinical stage compounds that are ready for IND enabling animal studies," Recny said.

With traditional venture capital firms shying away from this space it is an ideal time to invest in these lean and focused companies that have a compelling profile but are challenged in their quest to raise capital in the order of $3 million to $5 million, he said, acknowledging that it is a "binary bet" if successful significant value can be generated by helping companies move drug candidates into the clinic where they become attractive for potential partnerships or acquisition.

Calvert is now hoping to establish a consortium with other CROs that offer API manufacturing, formulation and drug product manufacturing that are willing to enter risk-sharing partnerships to further reduce the capital outlay preclinical companies need to get to an IND filing.